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As a cash basis entity, what expenses can I prepay and deduct in the current year?

Harvey & Parmelee LLP, December 1, 2010

In general, expenses can be prepaid and fully deductible in the current year as long as the benefit does not exceed twelve months and the benefit started during the current year.

There are, however, a few exceptions to this general rule:

  1. Prepaid insurance is deductible for premiums on the policy started during the current year and the policy term does not exceed a twelve month period.
  2. Prepaid interest is generally not deductible.
  3. A cash basis taxpayer may only deduct prepaid rent in the year paid if:
    1. It was actual prepaid rent and not just a deposit
    2. There was a substantial business reason for making the prepayment other than just an acceleration of a tax deduction and
    3. The prepayment did not cause a material distortion to the taxable income
  4. Prepaid salaries are generally not deductible.
  5. Prepaid taxes must be paid in good faith.

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